Why Your Consumer-Oriented Hyperlocal Startup Is Going to Fail

So you’ve recently built an amazing app that’s going to change peoples’ lives. It will be something they could have never lived without. When you first thought of the idea, you had the eureka moment when you said, “Why hasn’t anyone thought of this before? I’m totally going to build it!”

Maybe it was a local travel app, a collection of neighborhood news sites, or maybe a local city guide of things to do based on one’s interests. Maybe it’s an app to meet new friends nearby and tell others where you’re at, or maybe it’s a directory of businesses’ services and their pricing.

I’ll bet your business model is as follows: Scale our consumer base with an amazing hyperlocal app and then local businesses will be knocking down our door to advertise to our users.

I know this because I have spent the past several years dissecting and analyzing every consumer-focused, hyperlocal app imaginable. In an effort to build my own “awesome” hyperlocal app, UPlanMe, I was not only figuring out our own business model, but I was analyzing all of the potential competitors and their business models’ around us.

After nine months of trying to scale our startup and a lot of failure internally with our own app (as well as the failures of others in the hyperlocal space), I discovered the inherent flaws in almost every hyperlocal, consumer startup out there. It took that education to realize that that apps that will “win” are those that provide valuable hyperlocal marketing tools to the local business, regardless of the number of users on the app. This is subsequently why we changed our startup to focus solely on tools for the local business, and why we have finally begun to gain traction.

Here are the flaws that the hyperlocal, consumer-focused startups that have failed seem to have in common:

1. The app requires curated local content to engage users: Building content is costly and time-consuming. If you don’t engage your users with an abundance of content the moment they open the app, odds are they will never return. This also applies to apps that hope to grow by crowdsourced content. And without a large number of consumers using your app, businesses won’t be using it either. This brings me to my next point:

2. Local businesses won’t use the app unless it has users: This is the old chicken-and-egg theory. Without users, business owners aren’t going to waste a moment of their time promoting and marketing their content to your users. A full 88% of online marketing efforts are done by the business owner and 43% are spending 6+ hours a week doing so. Don’t forget that they also have to spend countless hours running their own business.

In order for local businesses to use your app, it’s going to need to a) reach a large percentage of their customer demographic, b) save them time on their existing marketing efforts, and c) not duplicate any of their existing efforts.

3. The app’s strategy is to build out city-by-city: What’s more difficult than building one successful startup? Try building 50 successful startups. This is essentially what you are doing when you try to launch city-by-city. Just because your app had success in San Francisco within your own network doesn’t necessarily mean it will have success in New York. If your app can’t launch nationwide from day one, you probably won’t have sufficient capital to build it out nationally, city-by-city. And it follows that the reason it most likely can’t launch nationally on day one is because of the issues raised in #1: “The app requires curated local content.”

4. The app doesn’t “sell” anything to consumers: It may in fact be possible to build a successful app that has components of #1, #2 and #3, but it’s going to need to sell some good product or service right from the beginning. Maybe it’s selling local tours or local experiences and taking a cut of the revenue. If there is a revenue stream coming directly from the consumer then there is a fighting chance. Remember, though, this type of app still needs to solve the chicken-and-egg conundrum. It needs to have valuable goods to offer the consumers from the onset to keep them coming back. And it’s going to need to have consumers at the onset to sell those goods to.

5. The app is going to need a massive local sales force to earn revenue: Let’s look at how large Groupon and Living Social’s sales forces are, and they are still struggling to maintain profitability. If you believe you’re going to need a large sales force for your consumer app, it’s probably already dead in the water.

6. The price point for local businesses is less than $300, annually: When I speak to many local business owners, some say they are approached by 30 to 40 apps every month trying to sell them on some product. Your sales force is going to find that they will have way more losses than wins. In my experience, for every 50 businesses we reach out to, maybe one will be receptive. Don’t forget that your sales force works on base plus commission. That coupled with your own digital marketing efforts means that your app is going to have to earn quite a bit of revenue from each and every customer to be profitable. Many of the players in our space tell me that the figure is somewhere around $300 per year for their own internal break-even. So, you have to step back and say to yourself: Is your product worth $300 to each and every business?

7. The app hasn’t raised several million dollars in financing: I’m sure by now many people reading this article will be listing off examples of successful consumer-based startups in the hyperlocal space. I will bet that most of these companies, however, have raised millions of dollars in financing. Let’s look at the most well-known. Foursquare has raised more than $112 million in outside funding. Prior to their most recent $41 million debt-financing round, it was estimated that Foursquare had only made $2 million in revenue in 2012.

Yelp has raised more than $62 million in funding and it wasn’t cash-flow positive until 2012 — eight years after it launched. Patch, which is backed by AOL, recently shutdown 400 of its non-performing sites and fired more than 350 employees (40% of its workforce). It’s continuing to struggle in the hyperlocal space despite being backed by a $2.5 billion company. The daily deal companies are earning millions in revenues, but they are also struggling to maintain profitability with their massive sales forces.

In my opinion, if you’re looking to tap into the hyperlocal startup space, your start-up will have a far better chance if you’re building a solution for local businesses that helps them regardless if you have a direct consumer-base. The app has to either save them time on their marketing efforts, or solve a direct problem they are having with marketing their business.

While B2B and B2B2C businesses aren’t as sexy, they do have a much stronger business model. Some of the more well-known start-ups that have been successful in the hyper-local space and that are focused on this market are: Yext, SinglePlatform (acquired), Locu (acquired), Eventbrite, MailChimp, Felix (acquired) and Yodle. I would suggest you study all of these business models before launching your next hyperlocal startup.

Nailed it: “In my opinion, if you’re looking to tap into the hyperlocal startup space, your start-up will have a far better chance if you’re building a solution for local businesses that helps them regardless if you have a direct consumer-base.” Help them leverage their existing distribution, email, social, web, mobile and give them drop dead simple tools. (Insert plug for LocalVox, of course…).

katzgrau

The bottom line is that selling to small businesses is damn near impossible if you don’t have an established relationship in place (or luck). That’s why I think most B2C, locally-focused startups are going to fail. Real relationship-based sales to Main St SMBs takes too long given the short runway most startups have to prove themselves viable.

Laura_Rich

This seems to imply that only legacy businesses (yellow pages, local medi) will be able to crack the hyperlocal nut, since they’re the ones with the relationships in place. Is that what you’re getting at?

noGenius

there is a missing piece of twitter. once they figure it out, and i have, it will change every single conversation having to do with “local”.

Great Article: Going nationwide has helped Judy’s Book & KidScore survive and gain share without a sales team where our paying businesses have a big long tail. The key is being able to scale your product to new areas. Focusing on large brands is going to increase your chances. Last build a unique product with a great experience for your target demographic.

Laura_Rich

This sounds like a guest post, Ali! Get in touch with David… Have a great weekend!

michael bradley

Excellent article! The chicken/egg problem continues to haunt me in my own efforts, and I agree that the app/service needs to be ready to function in all cities not just one. I’d be very interested in learning more of your successes and challenges in these areas.

Hi Sean,
This may be a bit far afield, but a recent article in Ad Age noted that, while AOL’s Patch is struggling, many small hyperlocal news sites that rely primarily on local business advertising continue to thrive. They simply aren’t easily scalable. I’m not sure whether you saw the post but would love to know how you think this might fit in with the discussion. I’m leaving this comment on the BizSugar website too and would love if you could leave a response there for the benefit of the whole community.

seanbarkulis

I can’t speak to that article, Heather, as I haven’t read it. However, all of the hyper-local news properties I have been hearing of recently, haven’t been successful. This includes Everyblock (which shutdown in February), Patch of course, and The Daily Voice (which shutdown all of its MA and some CT sites in March). If a small hyper-local site is able to thrive, it may be because they are located in a small town where there is no other way to advertise ones business. Either way, it’s clear this isn’t a scalable model. In any event, an individual, one-town local news property was not the type of consumer-oriented start-up I was speaking to.

Jim Simpson

As a years long sufferer of my own desires and (expensive) efforts to succeed in the realm of hyperlocal with everything from discount sites (as many others), to local debit cards ($1.5M investment in Visa platform), issued via local FI’s to mobile apps (our own WYSIWYG platform), I finally found someone that calls it as it is. But you’ve missed something. Your suggested solution doesn’t work either, or at least it hasn’t for us. What’s next?

seanbarkulis

Jim, it’s definitely an up-hill battle when it comes to providing B2B or B2B2C solutions for the local business, I agree. I would just say that those that have a clear path to revenue day 1, and build a solution that local businesses find invaluable, there is a fighting chance. That’s not to say there aren’t tons of failures in the space, as well.

Only once do the local business owners fully realize the value of hyperlocal solutions, will these types of platforms truly flourish, in my opinion.

Robert Gold

Before 2040, sensors,
augmentations, apparatuses and so forth, including those not even conceived yet will monitor, enhance and supplement humanity in areas like health, education
and other areas of life that are important to us.

It is obvious that these enhancements will be specific to each person, augmenting each person’s capacity. Given our current state of technological advancement and the merchandising paradigm, expressions for consumer orientation has already begun.

Logic points to a shift from
“products to consumer” to “consumer to products.” What might be hindering this shift is the domain of advertising.

Now what will this shift look like? Intelligence of the consumer for the merchandiser is very difficult, whereas intelligence of entities has far fewer permutations.

To get from today to 2040 this shift must take place.

What gets empowered shifts?

“If” isn’t an issue. The only question is when?

Gary Redden

Achieving financial success with a business supported online directory is possible and does not require an app if the site is mobile compatible. How do I know this? We’ve been profitably operating one for Destin, FL ( http://www.DestinDirect.com ) for the past 13 years. We’re currently launching an additional site in another market and will be in 6 markets by the end of the year.